What Is Inventory in Accounting?
Definition, types, and how closing inventory is valued.
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| Also called | Stock |
|---|---|
| Manufacturers hold | Raw materials, work in progress, finished goods |
| Valued at | Lower of cost and net realisable value |
Inventory in plain English
A shop’s inventory is the products on its shelves. A factory also holds raw materials and half-finished goods. Inventory stays on the balance sheet as an asset until it is sold. At that point its cost moves to cost of goods sold.
Worked example
A shop buys 100 units at 10 each, a total of 1,000. It sells 60 units.
| Item | Units | Cost |
|---|---|---|
| Bought | 100 | 1,000 |
| Sold (cost of goods sold) | 60 | 600 |
| Closing inventory | 40 | 400 |
- Valuing unsold stock at selling price instead of cost.
- Not writing down damaged or obsolete stock.
Frequently asked questions
What are the common inventory valuation methods?
FIFO (first in, first out) and weighted average cost are widely used. LIFO is allowed under some national rules but not under IFRS.
What is the difference between inventory and cost of goods sold?
Inventory is unsold goods still held as an asset. Cost of goods sold is the cost of goods already sold.
Why is inventory valued at the lower of cost and net realisable value?
So that assets are not overstated if goods can only be sold for less than they cost.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.